Commissioner of Income Tax vs M. Goodwell and Co. Ltd.

Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following question of law for the opinion of this court u/s

256(2) of the Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case and having regard to the provisions of rule 2(1) of the First Schedule to the Companies

(Profits) Surtax Act, 1964, the Appellate Tribunal was right in holding that the sum of Rs. 7,61,987 being the surcharge ordinarily payable but not

paid in view of the deposit made with the Industrial Development Bank of India as per the provisions of the Companies Deposits (Surcharge on

income tax) Scheme, 1976, should be deducted while arriving at the chargeable profits for the levy of surtax ?

The assessee is assessed to surtax. While computing the chargeable profits for the levy of surtax for the assessment year 1977-78, the Income

Tax Officer has not deducted the Income Tax surcharge payable of Rs. 7,61,987 since the assessee was not liable to pay the same in view of the

deposit made with the Industrial Development Bank of India. In so doing he rejected the assessee''s contention that the surcharge was otherwise

payable and, therefore, it should be allowed as a deduction in terms of rule 2(1) of the First Schedule to the Companies (Profits) Surtax Act, 1964

(hereinafter referred to as ""the Act""). On appeal, the Commissioner of Income Tax confirmed the order of the Income Tax Officer. Aggrieved, the

assessee filed an appeal before the Tribunal. The Tribunal, relying upon an earlier decision of its own held that the surcharge payable by the

company though not actually paid in lieu of the deposit made with the Industrial Development Bank of India should be deducted while arriving at

the chargeable profits under rule 2(1) of the First Schedule to the Act. Learned standing counsel for the Department submitted that unless the

surcharge is paid the assessee is not entitled to deduction while arriving at the chargeable profits under rule 2(1) of the First Schedule to the Act.

According to learned standing counsel, the fact that the assessee has deposited Rs. 8,25,000 with the Industrial Development Bank of India which

is more than the surtax payable by the assessee, viz., Rs. 7,61,987 would not entitle the assessee to ask for deduction under rule 2(1) of the First

Schedule to the Act. In order to support his contention reliance was placed upon a decision of the Karnataka High Court in Widia (India) Ltd. Vs.

Commissioner of Income Tax, and another decision of the Gujarat High Court in the case of Ambica Mills Ltd. Vs. Commissioner of Surtax, .

On the other hand, learned counsel for the assessee, while supporting the order passed by the Tribunal submitted that the surtax payable by the

assessee was Rs. 7,61,987 and the assessee had in fact deposited a sum of Rs. 8,25,000 with the Industrial Development Bank of India under the

Companies Deposits Scheme. Since a larger amount was deposited than what was payable as surcharge, the assessee is entitled to deduction

under rule 2(1) of the First Schedule to the Act. It was, therefore, stated that the Tribunal was correct in holding that the surcharge payable by the

company though not actually paid, in view of the deposit made with the Industrial Development Bank of India, should be deducted while arriving at

the chargeable profit under rule 2(1) of the First Schedule to the Act.

As already seen the surtax payable by the assessee was Rs. 7,61,987. In fact, the assessee has deposited a sum of Rs. 8,25,000 with the

Industrial Development Bank of India under the Companies Deposits Scheme. Therefore, the assessee claimed the deduction under rule 2(1) of

the First Schedule to the Act.

Section 2(v) of the Companies (Profits) Surtax Act, 1964, defines the terms ""chargeable profits"". This is to be computed in accordance with the

First Schedule to the Act. Under rule 2(1) of the First Schedule, the Income Tax payable by the company is deductible. The scheme formulated

under the provisions of the Companies Deposits (Surcharge on income tax) Scheme, 1976, provides that a company may deposit an amount with

the Industrial Development Bank of India in lieu of payment of surcharge on Income Tax and this amount could be refunded after a few years.

The surcharge payable by the company though not actually paid in view of the deposit made with the Industrial Development Bank of India, the

assessee can claim deduction while arriving at the chargeable profit under rule 2(1) of the First Schedule to the Companies (Profits) Surtax Act,

1964.

A similar question, viz., whether, on the facts and in the circumstances of the case, the deposits made with the Industrial Development Bank of

India are not tantamount to payment of surcharge on Income Tax and, therefore, are not deductible for the purpose of computing the chargeable

profits came up for consideration before the Karnataka High Court in the case of Widia (India) Ltd. Vs. Commissioner of Income Tax, . While

answering this question, the Karnataka High Court held as under (at page 79) :

The Appellate Tribunal has taken the view that the deposit with the Industrial Development Bank of India is not the same as payment of the tax,

which is one aspect. Another facet of interpretation is to understand the word ''payable'' in rule 2 in the context of the second proviso to section

2(6) of the Finance Act. The said proviso states that, in lieu of payment of surcharge .... deposit may be made under the scheme. In other words,

instead of the tax being paid, the amount could be deposited. The deposit results in removing the liability to make the payment. In other words, on

the deposit being made, the tax ceases to be ''payable''. The language of rule 2 of the First Schedule to the Surtax Act also requires that the tax

''payable'' by the company is to be reduced from the total income. If the tax is not payable, then the said amount cannot go in reduction of the total

income. The payability of the tax is the basis to attract rule 2(1) of the said Schedule. The making of the deposit by the assessee with the Industrial

Development Bank of India removes the liability to pay the tax, i.e., the tax ceases to be payable. If so, there is no scope to apply rule 2 of the said

Schedule. Therefore, the question referred to us will have to be answered necessarily in the affirmative and against the assessee. Reference is

answered accordingly. That is to say, the deposits made with the Industrial Development Bank of India do not amount to payment of Income Tax

and, therefore, are not deductible for the purpose of computing the chargeable profits.

A similar question came up again for consideration before the Gujarat High Court in the case of Ambica Mills Ltd. Vs. Commissioner of Surtax,

, wherein the question referred for the opinion of the High Court was ""whether, on the facts and in the circumstances of the case, the Tribunal was

right in law in holding that the deposit made with the Industrial Development Bank of India (IDBI) for a sum of Rs. 9,23,283 in lieu of surcharge on

Income Tax was not deductible for computing the chargeable profits under the Surtax Act ?"" While answering this question by following the earlier

decision of the Karnataka High Court in Widia (India) Ltd. Vs. Commissioner of Income Tax, , the Gujarat High Court has held as under

(headnote) :

That the deposit made with the Industrial Development Bank of India could not be treated as tax paid. The payment of deposit essentially differs

from payment of tax and though the liability to pay the surcharge was taken away by making the deposit with the Industrial Development Bank of

India, it could not be treated as any deemed payment of surcharge. If it was intended to be treated as deemed payment of surcharge, there would

have been no need to provide in section 2(8) of the Finance Act, 1976, that surcharge payable would be ''nil'' in such cases of deposit of the entire

amount with the Industrial Development Bank of India. The amount of deposit would be repaid, after the prescribed period was over, to the

assessee, which would never have been the case in respect of payment of surcharge on the Income Tax. The matter was not capable of debate or

two views and the Tribunal rightly held that the rectification order u/s 13 by the Surtax Officer was justified. The Tribunal was also right in holding

that the deposit made with the Industrial Development Bank of India by the assessee for a sum of Rs. 9,23,283 in lieu of surcharge on Income Tax

was not deductible for computing the chargeable profits under the Surtax Act.

On considering the facts arising in the present case in the light of the judicial pronouncements cited supra, we hold that the Tribunal was not

correct in coming to the conclusion that the deposit made with the Industrial Development Bank of India by the assessee in lieu of surcharge on

Income Tax was deductible for computing the chargeable profits under the Surtax Act. Therefore, we hold that the deposit made in lieu of

surcharge on Income Tax is not deductible for computing the chargeable profit under the Surtax Act. Accordingly, we answer the question referred

to us in the negative and in favour of the Department. However, there will be no order as to costs.